01 December 2016

On this business of Carrier’s factories in Indiana, and the dreadful signal it sends to defense contractors

When President-elect Trump and Senator Sanders team up on both economic and military policy, I have reason to be wary. Last weekend, Roberta Rampton reported for Reuters how The Bern asked The Donald to “use defense contracts as leverage for Carrier jobs.” The manufacturer of air conditioners is but one division of United Technologies, which also sells billions of dollars in aircraft parts through UTC Aerospace Systems, and billions in jet engines through Pratt & Whitney. Much of these go to air lines, and much go to air forces—particularly the air arms of all the US armed forces. We might hope Sander’s demand was just collectivist braggadocio, but Matthew Nussbaum’s article for Politico explained quite clearly what was new:

…John Mutz, a former Indiana lieutenant governor who sits on the agency’s 12-member board, told POLITICO that Carrier turned down a previous offer from IEDC [the Indiana Economic Development Corporation] before the election. He said he thinks the choice is driven by concerns from Carrier’s parent company, United Technologies, that it could lose a portion of its roughly $6.7 billion in federal contracts.

At the intersection of socialism and capitalism lies crony capitalism, and as my former teacher Luigi Zingales has warned, that’s why capitalism periodically requires rescuing from the capitalists. All this arm-twisting can quickly lead to economic regimes that are not so much pro-market, but pro-business, or at least pro-businesses that play ball with the politically powerful. Take note how Sanders wrote today under his own name in the Washington Post that all this wasn’t good enough, because Carrier would be moving about 1100 of its 2100 positions to Mexico after all. In short, there’s no satisfying these people.

Take further note, then, that one of the more notable rebukes from industry of the president-elect's haranguing during the election campaign came from Ray Connor, the retiring president of Boeing Commercial Airplanes. That’s a company that has some experience with working the governments of both Washington State and the United States in its efforts to keep Airbus at bay. Like UTC, both Airbus and Boeing sell to both commercial and military customers, and participation in each market is very useful for maintaining a competitive edge in the other. The entire business of international trade in airliners has been an decades long-effort in mutual assured destruction. If Boeing is spooked, you know something has gone too far.

So trade—just the power, the devastation is very important… wait, that’s not the quote. And that’s because trade is not a zero-sum game. Tariffs are economically inefficient. Indeed, they're self-impoverishing. Demonstrating so is a trivial exercise in microeconomics. But at least don’t make this about national defense. Home air conditioning units have only the slightest role there. The danger lies in the message that this microcosmic dirigisme sends to industry: if you want to streamline operations, dump your defense divisions first. Forget about integration of advanced technologies from civil sectors into military products. You’ll have to spend way too much time explaining to the new Jobs Czar where you’ll be making the cell phones and whatever else. And that will be a tragedy for national security.

15 November 2016

At the conclusion of an unconventional but brilliant campaign, Donald Trump has effected, in terms he might appreciate, a hostile takeover of the executive branch of the United States federal government. In that campaign, he repeatedly promised to move swiftly towards administrative change, perhaps in a hundred-day campaign. There is reason to move out smartly. As Paul Ryan wrote in A Better Way: Our Vision for a Confident America, enemies and adversaries are “moving at the speed of broadband, so we cannot move at the speed of bureaucracy.” Rather, as the Speaker said the day after the election, with majorities in both legislative houses, “the opportunity is to go big, go bold and to get things done.” For his part, Trump has promised to prioritize private-sector experience and thinking in installing leaders and formulating policies for all federal agencies. So, for Defense, what now?

At Defense, an endemic problem of cost-ineffectiveness has been brewing for decades, with endless streams of cash pouring down seemingly endless holes of Middle Eastern wars that are never quite won. The worst is born out in the operational approaches that Colonel Mike Pietrucha of the USAF has called “logistical fratricide,” and that Tobias Burgers and Scott Nicholas Romaniuk have called “shooting ants with elephant guns.” All this high-technology whack-a-mole has accelerated capital depreciation, by which the military has accrued further costs for service life extensions, and a continual, grinding trade of aging systems for more expensive kit in lesser quantities. As recently pointed out by Major General Jeff Newell, the now-retired former chief strategist for the USAF, a key element of strategy is to stop doing some things so that one can start doing other more important things.

Fortunately, we have a model that should be familiar to the new administration. When a businessman takes over a new business, he usually undertakes detailed surveys beyond his earlier due-diligence. He gathers those in the know, and asks where are the factories? The distribution centers? The research laboratories? Who really runs that department? Where do all the back-office people sit? After some answers, the question that follows is usually and do we really need all of this? For as Libertarian Vice Presidential candidate Bill Weld said to a CNN town hall meeting earlier this year, “I've never seen a layer of government that didn't have 10 or 20 percent waste in it.” If President-elect Trump wants to rebuild the military without exacerbating the government’s debt problem, he may want to pursue unconventional ideas for finding radical economies and opportunities.

At Defense, fundamentally rethinking structures and systems along business-like lines could save billions, particularly in sustainment spending, freeing up money for investment in new weapons, ships, and aircraft. Fairly, government isn’t a business, and it can’t quite be run like a business, but the US Defense Department desperately needs some business-like discipline in its planning, purchasing, and operations. For fifteen years, Defense has had a Defense Business Board, but its advice has too often been absorbed without effect or even affect. Even beyond the DBB’s ideas, Defense needs business models, to cite Northwestern University’s Robert Wolcott, that don’t just defend the present, but look to the future.

So what, broadly, are some of the options? Over the next several months, The Defense Industrialist will be focusing on building out the ideas, to provide advice to this administration on bringing some discipline to the defense enterprise. Implementing much of this change won’t be easy, but something better than today’s tired answers is essential.

James Hasik is a senior fellow at the Brent Scowcroft Center on International Security, where this essay first appeared on The Defense Industrialistblog.

One point raised during the discussion was whether Future Vertical Lift should be modeled along the lines of the F-35. This could entail multi-national involvement in development of helicopters to replace medium lift and attack variants.

A Joint Vertical Future aircraft (JVF)? It’s always an appealing idea, spreading development costs across multiple countries, and then spreading the fixed elements of sustainment costs across a huge multinational fleet. Besides, as a friend at Naval Air Systems Command once put it to me,

probably by the 2030s, the bad smell of JSF development will have dissipated, and so another joint program for something—drones or hypersonic missiles or whatever—will follow in the footsteps of TFX and JAST.

The Tactical Fighter Experimental (TFX), the first effort at One Fighter to Rule Them All, was Robert McNamara’s scheme to equip both the US Navy and Air Force with the F-111. That ended painfully. The Joint Advanced Strike Technology (JAST) program, as I was relating the other day on the Defense Industrialist blog, was the forerunner of the JSF, which began way back in 1994. That’s ongoing. That I feel compelled to restate the terms, in case not every history-of-armaments nerd recalls, may be a testament to how easily harsh lessons of weapons development are forgotten, at least over the decades.

The winners of such a winner-take-all would relish the idea, but frankly, we shouldn’t expect such an outcome in rotorcraft. There’s just too much commonality between military and commercial requirements, so technical success in the commercial business will continue to matter in the military realm. The economics of the industry are such that the big rotorcraft companies don’t face endlessly and sharply dropping cost curves, so there’s no urgency for any merger to monopoly. As there’s not, competition law and policy in the US and EU will prevent it. And finally, with multiple rotorcraft companies then producing multiple types of usable vertical lift aircraft, there’s no sound reason to try to force a single design across, say, the 28 member states of NATO.

Put another way, one could just as plausibly ask Airbus and Boeing to build an airliner together.

08 August 2016

Two years ago this week, a former Army acquisition official wrote to me in exasperation at the apparent disconnect between the acquisition under secretary’s “better buying power” guidance for procurement strategy, and the bureaucracy’s misapplication of it:

As [Under Secretary Frank] Kendall describes it, “define best value, so industry knows what we are willing to pay for the increased performance. [We need to] give industry a reason to be innovative, to bid above the threshold”… [But] how does this reconcile with what appears to be an enormous prevalence for LPTA acquisition? I've seen multi-million dollar requirements go to the winner based on a few thousand dollars difference when the higher price was pretty clearly technically superior.

And so it may be with DISA’s ENCORE III. As I noted last week, that agency got a smackdown from the GAO, which sustained a pre-award protest from BAH and CACI. The GAO reserved its harshest criticism for the combination of a Lowest-Price, Technically-Acceptable (LPTA) approach for much of the solicitation with price floors and price-indifference elsewhere. So, just today, Tony Bertuca of Inside Defense reports that DISA “won't alter [the] LPTA approach,” because the GAO only disallowed the other problems.

Someone is clearly not getting the message. I’ve been on a public crusade against LPTA contracting for at least three years now. Just to summarize, here are links to some of the essays in which I’ve criticized how widespread the misapplication of buying-on-price has become in the US Defense Department, both here and on the Atlantic Council’s Defense Industrialist blog:

Not the School Solution. Not Even Close. Using the LPTA criterion for the ENCORE III award is very bad idea (29 April 2016).

But don’t take it from me. Go ask anyone who runs a corporate purchasing department. Go ask anyone who teaches supply chain management at a business school. An LPTA purchasing strategy is either just plain crazy, or deeply lazy. Either way, it needs to be run out of the Defense Department.

03 August 2016

I was hoping that the madness would stop, and perhaps it has. As Marjorie Censer reports for Inside Defense, the US Government Accountability Office (GAO) has sustained a pre-award protest by both Booz Allen Hamilton and CACI against the Defense Information Systems Agency (DISA) in its ENCORE III solicitation. That is, the GAO has told DISA—even before a contract was awarded—that its use of a lowest-price, technically-acceptable (LPTA) set of selection criteria could not “provide a reasonable basis for comparing the cost of competing proposals”. The auditors put it this way:

First, although the RFP contemplates awarding some portion of the task orders on a cost reimbursement basis—perhaps as many as half of the orders, according to the record developed during the protest—the solicitation does not seek any information for, or provide for the evaluation of, any of these costs. Second, the solicitation establishes a cost/price evaluation scheme that mandates the elimination of an offeror's proposal if the total proposed price falls below a pre-defined level.

As I wrote back in April on the Atlantic Council’s Defense Industrialist blog, LPTA is not the school solution for a complicated IT deal. It’s not even close. But the way the GAO lays out the case, on the part of DISA, this was at best cognitive dissonance. For as much as half the work, the agency wasn’t even going to ask a price in advance, and for the other half, prices thought too low would be rejected. For the work as a whole, though, lowest-price was the overarching criterion.

Huh?

On its face, DISA’s strategy made no sense. Perhaps there’s a more complicated explanation out there that would, but the GAO thinks not. Contrary to perception, the GAO rarely opposes federal agencies’ contracting decisions. Consequently, recommending a restart in a solicitation work up to $17.5 billion deal over ten years (see below) is a huge matter for industry—at least for firms that actually want to deliver quality services to the military enterprise.

It’s also a reminder that persistent, smart lobbying by trade associations can make a difference. As Marjorie noted in another article, both the Professional Services Council and the IT Alliance for Public Sector have been all over this issue for some time. And that’s another reminder that defense agencies and military departments should dream up managerial ideas on their own without the involvement of people who actually know how business functions. This may not be the end of the madness of LPTA, but it’s a salient defeat.

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What I Do

Since September 2001, I have been researching and writing about global security challenges, and advising the economic enterprises that provide the tools to address them. Specifically, I help defense contractors and defense ministries with their problems in marketing, planning, and policy analysis.